Timing Your Earnings in Retirement to Optimize Your Social Security Retirement Benefit – Part 1

What is it?

If you work after you begin receiving Social Security retirement benefits, all or part of your retirement benefit may be withheld if your earnings exceed the retirement earnings exempt amount. However, excess earnings won’t affect your benefit once you reach normal retirement age, and it’s possible to time your earnings in retirement in order to optimize your benefit.

Example(s): Lewis retired in 2015 at age 62. In 2016, he goes back to work and earns $17,720 working part-time.

Since the annual retirement earnings test exempt amount is $15,720 in 2016, Lewis’s retirement benefit is reduced by $1,000 the following year ($1 in benefits was withheld for every $2 of excess earnings). If Lewis had reached his normal retirement age when he went back to work, his retirement benefit wouldn’t have been affected by excess earnings.

Who can benefit from using this strategy?

If you’re under normal retirement age and earn more than the annual retirement earnings test exempt amount by working after you retire, you may benefit from timing your earnings in retirement.

How to do it Postpone your earnings

The easiest way to avoid having all or part of your Social Security benefit withheld due to excess earnings is to postpone your earnings. You can postpone your earnings in two ways:

The first way is to determine when you actually work and earn income: If you’re working for an employer, your wages are counted as income in the year you earn them. Because earnings at normal retirement age or later will never reduce your Social Security retirement benefit, you might postpone working after retirement until you reach normal retirement age if you expect to have excess earnings.

Example(s):

Leslie was bored after she retired. When she was 65, she thought about working as a used-car salesperson at the local dealership. However, she thought that she could sell a lot of cars and make a lot of money, so she decided to wait until she turned 66 (her normal retirement age) before applying at the dealership so that any excess earnings she had would have no effect on her retirement benefit.

The second way is to postpone when you receive your earnings: If you’re self-employed, you can limit the effect of excess earnings on your retirement benefit by postponing when you receive your earnings. This is because earnings from self-employment are treated as earnings in the year they’re received.

Example(s): By December 1, 2016, Keith (who is 63) makes $10,000 for the year working part-time as a carpenter. Since $10,000 is below the retirement earnings test exempt amount for 2016 ($15,720), Keith knows that his 2016 earnings won’t affect his Social Security retirement benefit. Then, he takes a $7,000 job on December 26 and becomes concerned that the job will affect his retirement benefit by pushing his 2016 earnings over the retirement test exempt amount. His wife reminds him that because he wouldn’t be paid for the job until January, those earnings wouldn’t count toward the retirement test exempt amount until 2017.

Article courtesy of Forefield.Securities offered through NPB Financial Group, LLC. A Registered Investment Advisor/Broker-Dealer Member FINRA, MSRB, and SIPC